17 unchanged sentences
The severity of potential declines in our tangible net book value due to fluctuations in interest rates would depend on our asset, liability, and hedge composition at the time, as well as the magnitude and duration of the interest rate change.
−Removed: measures of an instrument's price sensitivity to interest rate fluctuations are its duration and convexity.
+Added: Primary measures of an instrument's price sensitivity to interest rate fluctuations are its duration and convexity.
Duration measures the estimated percentage change in market value of an instrument that would be caused by a parallel change in short and long-term interest rates.
−Removed: The duration of our assets will vary with changes in interest rates and tends to increase when interest rates rise and decrease when interest rates fall.
+Added: The duration of our assets will vary with changes in interest rates and tends to increase when interest rates rise
+Added: and decrease when interest rates fall.
This "negative convexity" generally increases the interest rate exposure of our investment portfolio in excess of what is measured by duration alone.
−Removed: We estimate the duration and convexity of our assets using both a third-party risk management system and market data.
+Added: We estimate the duration and convexity of our assets using a third-party risk management system and market data.
We review the duration estimates from the third-party model and may make adjustments based on our judgment to better reflect any unique characteristics and market trading conventions associated with certain types of securities.
6 unchanged sentences
Interest Rate Sensitivity 1,2
−Removed: December 31, 2019
−Removed: December 31, 2018
−Removed: Change in Interest Rate
−Removed: Estimated Change in Portfolio Market Value
−Removed: Estimated Change in Tangible Net Book Value Per Common Share
−Removed: Estimated Change in Portfolio Market Value
−Removed: Estimated Change in Tangible Net Book Value Per Common Share
+Added: December 31, 2020 December 31, 2019
+Added: Change in Interest Rate Estimated Change in Portfolio Market Value Estimated Change in Tangible Net Book Value Per Common Share Estimated Change in Portfolio Market Value Estimated Change in Tangible Net Book Value Per Common Share
-100 Basis Points -1.2% -12.6% -0.5% -6.0%
2 unchanged sentences
+50 Basis Points -0.1% -1.1% -0.4% -4.7%
+Added: +75 Basis Points -0.4% -4.0% -0.8% -9.1%
+Added: +100 Basis Points -0.8% -8.1% -1.3% -14.8%
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2 unchanged sentences
Includes the effect of derivatives and other securities used for hedging purposes.
+Added: Interest rates are assumed to be floored at 0% in down rate scenarios.
Prepayment Risk
Prepayment risk is the risk that our assets will be repaid at a faster rate than anticipated.
−Removed: Interest rates and numerous other factors affect the rate of prepayments, including housing prices, general economic conditions, loan age, size and loan-to-value ratios, and the pace of GSE buyouts of delinquent loans underlying our securities among other factors.
+Added: Interest rates and numerous other factors affect the rate of prepayments, such as housing prices, general economic conditions, loan age, size and loan-to-value ratios, and GSE buyouts of delinquent loans underlying our securities.
Generally, prepayments increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates.
6 unchanged sentences
Extension risk is the risk that our assets will be repaid at a slower rate than anticipated and generally increases when interest rates rise.
−Removed: In which case, we may have to finance our investments at potentially higher costs without the ability to reinvest principal into higher yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting our net interest spread, and thus our net interest income.
+Added: In rising or higher interest rate environment, we may have to finance our investments at potentially higher costs without the ability to reinvest principal into higher yielding securities because borrowers prepay their mortgages at a slower pace than originally expected, adversely impacting our net interest spread, and thus our net interest income.
As of December 31, 2020 and 2019, our investment securities (excluding TBAs) had a weighted average projected CPR of 17.6% and 10.8%, respectively, and a weighted average yield of 2.33% and 3.07%, respectively.
−Removed: The table below presents estimated
−Removed: weighted average projected CPRs and yields for our investment securities should interest rates go up or down instantaneously by 50 and 100 basis points.
+Added: The table below presents estimated weighted average projected CPRs and yields for our investment securities should interest rates go up or down instantaneously by 50, 75 and 100 basis points.
Estimated yields exclude the impact of retroactive "catch-up" premium amortization adjustments from prior periods due to changes in the projected CPR assumption.
Interest Rate Sensitivity 1
−Removed: December 31, 2019
−Removed: December 31, 2018
−Removed: Change in Interest Rate
−Removed: Weighted Average Projected CPR
−Removed: Weighted Average Asset Yield 2
−Removed: Weighted Average Projected CPR
−Removed: Weighted Average Asset Yield 2
+Added: December 31, 2020 December 31, 2019
+Added: Change in Interest Rate Weighted Average Projected CPR Weighted Average Asset Yield 2
+Added: Weighted Average Projected CPR Weighted Average Asset Yield 2
-100 Basis Points 25.6% 1.91% 20.3% 2.73%
-75 Basis Points 23.9% 1.99% 17.7% 2.82%
+Added: -50 Basis Points 21.9% 2.09% 15.0% 2.90%
Actual as of Period End 17.6% 2.33% 10.8% 3.07%
1 unchanged sentence
+75 Basis Points 13.0% 2.51% 7.5% 3.15%
+Added: +100 Basis Points 11.9% 2.56% 6.8% 3.16%
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7 unchanged sentences
Consequently, although we use hedging instruments to attempt to protect against moves in interest rates, our hedges are generally not designed to protect against spread risk, and our tangible net book value could decline if spreads widen.
−Removed: Fluctuations in mortgage spreads can occur independent of interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by U.S.
−Removed: and foreign central banks, liquidity, or changes in required rates of return on different assets.
+Added: Fluctuations in mortgage spreads can occur due to a variety of factors, including changes in interest rates, prepayment expectations, actual or anticipated monetary policy actions by the U.S.
+Added: and foreign central banks, liquidity conditions, required rates of returns on different assets and other market supply and demand factors.
The table below quantifies the estimated changes in the fair value of our assets, net of hedges, and our tangible net book value per common share as of December 31, 2020 and 2019 should spreads widen or tighten by 10, 25 and 50 basis points.
4 unchanged sentences
Spread Sensitivity 1,2
−Removed: December 31, 2019
−Removed: December 31, 2018
−Removed: Change in MBS Spread
−Removed: Estimated Change in Portfolio Market Value
−Removed: Estimated Change in Tangible Net Book Value Per Common Share
−Removed: Estimated Change in Portfolio Market Value
−Removed: Estimated Change in Tangible Net Book Value Per Common Share
+Added: December 31, 2020 December 31, 2019
+Added: Change in MBS Spread Estimated Change in Portfolio Market Value Estimated Change in Tangible Net Book Value Per Common Share Estimated Change in Portfolio Market Value Estimated Change in Tangible Net Book Value Per Common Share
-50 Basis Points +2.2% +23.9% +2.5% +28.0%
2 unchanged sentences
+10 Basis Points -0.4% -4.8% -0.5% -5.6%
+Added: +25 Basis Points -1.1% -11.9% -1.2% -14.0%
+Added: +50 Basis Points -2.2% -23.9% -2.5% -28.0%
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4 unchanged sentences
Our liquidity risk principally arises from financing long-term fixed rate assets with shorter-term variable rate borrowings.
−Removed: As of December 31, 2019 , we had unrestricted cash and cash equivalents of $0.8 billion and unpledged securities of approximately $4.8 billion available to meet margin calls on our funding liabilities and derivative contracts and for other corporate purposes.
+Added: Future borrowings are dependent upon the willingness of lenders to finance our investments, lender collateral requirements and the lenders’ determination of the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates and liquidity conditions within the commercial banking and mortgage finance industries.
+Added: As of December 31, 2020, we believe that we have sufficient liquidity and capital resources available to execute our business strategy (see Liquidity and Capital Resources in this Form 10-K for additional details).
However, should the value of our collateral or the value of our derivative instruments suddenly decrease, margin calls relating to our funding liabilities and derivative agreements could increase, causing an adverse change in our liquidity position.
−Removed: there is no assurance that we will always be able to renew (or roll) our short-term funding liabilities.
+Added: Furthermore, there is no assurance that we will always be able to renew (or roll) our short-term funding liabilities.
In addition, our counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge against our funding liabilities, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll our funding liabilities.
−Removed: Significantly higher haircuts can reduce our ability to leverage our portfolio or even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.
−Removed: In addition, we often utilize TBA dollar roll transactions to invest in and finance Agency RMBS.
−Removed: Under certain conditions it may be uneconomical to roll our TBA dollar roll transactions beyond the next settlement date and we could have to take physical delivery of the underlying securities and settle our obligations for cash, which could negatively impact our liquidity position, result in defaults or force us to sell assets under adverse conditions.
+Added: Significantly higher haircuts can reduce our ability to leverage our portfolio or may even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.
Our credit sensitive investments, such as CRT and non-Agency securities, expose us to the risk of nonpayment of principal, interest or other remuneration we are contractually entitled to.
We are also exposed to credit risk in the event our repurchase agreement counterparties default on their obligations to resell the underlying collateral back to us at the end of the repo term or in the event our derivative counterparties do not perform under the terms of our derivative agreements.
−Removed: We accept credit exposure related to our credit sensitive assets at levels we deem to be prudent within the context of our overall investment strategy.
+Added: We accept credit exposure related to our credit sensitive assets at levels we deem prudent within the context of our overall investment strategy.
We attempt to manage this risk through careful asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, and the sale of assets where we identify negative credit trends.
4 unchanged sentences
There is no guarantee that our efforts to manage credit risk will be successful and we could suffer losses if credit performance is worse than our expectations or our counterparties default on their obligations.
−Removed: Excluding amounts cleared through a central clearing exchange, as of December 31, 2019 , our maximum amount at risk with any counterparty related to our repurchase agreements was less than 4% of our tangible stockholders' equity and less than 1% of tangible stockholders' equity related to our interest rate swap and swaption agreements.
+Added: Excluding central clearing exchanges, as of December 31, 2020, our maximum amount at risk with any counterparty related to our repurchase agreements was less than 2% of tangible stockholders' equity and related to our derivative agreements was less than 1% of tangible stockholders' equity.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.